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The Supreme Court ruling on President Obama's health-care overhaul was supposed to lift the confusion clouding one-sixth of the U.S. economy and energize health-care stocks. So far, it's proving as divisive in the stock market as it is with the voting public.

Thursday's historic ruling in favor of a mandate requiring Americans to have health insurance or pay a penalty could swell the ranks of newly insured patients by more than 30 million. That lifted acute-care hospitals and Medicaid providers, some by double-digit percentages late last week. But the threat of new taxes and profit-constraining regulations also worried a big swath of other stocks like drug makers, medical-device companies, and big health insurers.

Sheryl Skolnick, co-head of research at CRT Capital Group, thinks investors should "enjoy the rally while it lasts." For one thing, any benefit from less bad debt could be offset by slower reimbursement growth and fiscal belt-tightening. The law's major provisions won't kick in until 2014, and Republicans have vowed to repeal the law the first chance they get. "I think the market has overreacted, without taking into account the risks from lower reimbursements and the November election."

Barron's anticipated the decision (see "How to Play the Obamacare Ruling," June 11), while prediction markets like Intrade recently pegged the odds of an overturn at more than 70%.

"While the government may play a bigger role in health care, the entire system still ultimately relies on insurers," says David Pearl, co-chief investment officer of Epoch Investment Partners, who likes the prospects for big diversified insurers and holds shares of Aetna. "In the long run, the biggest insurers are likely to be low-cost providers, and they're more likely to gain market share." Since the health-care overhaul was unveiled two years ago, insurers have started to tweak their businesses, and share prices have begun to reflect the anticipated margin pressures and commodification of managed-care services. The group trades at less than 10 times projected profits, below their median of 13.4 times over the past decade and at a 20% discount to the overall stock market.

Cantor Fitzgerald analyst Joseph France also thinks the market has overlooked the potential for consolidation and the ability of big insurers like UnitedHealth to counter rising costs by expanding services. Humana's chief business, Medicare-related policies, is "growing rapidly because of baby boomers aging into Medicare and choosing managed care, and the company's long-term strategy of reinvesting in more cost-effective products that preserve the benefits its members find most attractive." He thinks shares are worth 11 times projected 2013 profits, or $95—above current level near $77.

Moody's estimates that the reform will cost drug makers about $85 billion over 10 years, mostly in the form of higher rebates to the government for Medicaid drug costs, discounts to seniors, and fees. Companies with substantial U.S. sales are exposed to the overhaul's costs, although
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1.44372.613977910555857%
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27.745098039215687Market Cap
92302031056.2607
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2.756183745583039% Rev. per Employee
738840More quote details and news »bmyinYour ValueYour ChangeShort position
(BMY) and
Eli Lilly lly 1.1087959517785384%Eli Lilly & Co.U.S.: NYSEUSD67.935
0.7451.1087959517785384%
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29.713509724899247Market Cap
74174268683.9551
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3.007518796992481% Rev. per Employee
504838More quote details and news »llyinYour ValueYour ChangeShort position
(LLY) have product mixes skewed to the Medicaid population and could face heavier mandates. The bottom line: Incremental pressure on drug makers and medical product companies to show their therapies not only work, but are worth the premiums they charge.

Still, some investors will be glad to move on. Defensive sectors like telecoms and utilities have rallied this nervous quarter, but not health care. "Removing this cloud of uncertainty, even if it isn't the optimal outcome for some companies, should help valuations catch up," Pearl says.

The National Health

The U.S. health-care overhaul could reduce hospitals' bad debts and give insurers millions of new customers, but it could also pressure the industry's premiums.